[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]


 
                       "STRENGTHENING PENSION SECURITY:
                      EXAMINING THE HEALTH AND FUTURE OF
                        DEFINED BENEFIT PENSION PLANS"



                                    HEARING
                                  BEFORE THE
                  SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS
                                    OF THE
                           COMMITTEE ON EDUCATION AND
                                 THE WORKFORCE
                            HOUSE OF REPRESENTATIVES
                           ONE HUNDRED EIGHTH CONGRESS
                                 FIRST SESSION
		
                 HEARING HELD IN WASHINGTON, DC, JUNE 4, 2003

                               Serial No. 108-18

               Printed for the use of the Committee on Education
               and the Workforce


88-813              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
____________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing Office
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                 COMMITTEE ON EDUCATION AND THE WORKFORCE
                     JOHN A. BOEHNER, Ohio, Chairman

THOMAS E. PETRI, Wisconsin		GEORGE MILLER, California
CASS BALLENGER, North Carolina		DALE E. KILDEE, Michigan
PETER HOEKSTRA, Michigan		MAJOR R. OWENS, New York
HOWARD P. "BUCK" McKEON, California	DONALD M. PAYNE, New Jersey
MICHAEL N. CASTLE, Delaware		ROBERT E. ANDREWS, New Jersey
SAM JOHNSON, Texas			LYNN C. WOOLSEY, California
JAMES C. GREENWOOD, Pennsylvania	RUBE?N HINOJOSA, Texas
CHARLIE NORWOOD, Georgia		CAROLYN McCARTHY, New York
FRED UPTON, Michigan			JOHN F. TIERNEY, Massachusetts
VERNON J. EHLERS, Michigan		RON KIND, Wisconsin
JIM DeMINT, South Carolina		DENNIS J. KUCINICH, Ohio
JOHNNY ISAKSON, Georgia			DAVID WU, Oregon
JUDY BIGGERT, Illinois			RUSH D. HOLT, New Jersey
TODD RUSSELL PLATTS, Pennsylvania	SUSAN A. DAVIS, California
PATRICK J. TIBERI, Ohio			BETTY McCOLLUM, Minnesota
RIC KELLER, Florida			DANNY K. DAVIS, Illinois
TOM OSBORNE, Nebraska			ED CASE, Hawaii
JOE WILSON, South Carolina		RAU?L M. GRIJALVA, Arizona
TOM COLE, Oklahoma			DENISE L. MAJETTE, Georgia
JON C. PORTER, Nevada			CHRIS VAN HOLLEN, Maryland
JOHN KLINE, Minnesota			TIMOTHY J. RYAN, Ohio
JOHN R. CARTER, Texas			TIMOTHY H. BISHOP, New York
MARILYN N. MUSGRAVE, Colorado
MARSHA BLACKBURN, Tennessee
PHIL GINGREY, Georgia
MAS BURNS, Georgia

                       Paula Nowakowski, Chief of Staff
                   John Lawrence, Minority Staff Director



                 SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS
                         SAM JOHNSON, Texas, Chairman

JIM DeMINT, South Carolina		ROBERT E. ANDREWS, New Jersey
JOHN A. BOEHNER, Ohio			DONALD M. PAYNE, New Jersey
CASS BALLENGER, North Carolina		CAROLYN McCARTHY, New York
HOWARD P. "BUCK" McKEON, California	DALE E. KILDEE, Michigan
TODD RUSSELL PLATTS, Pennsylvania	JOHN F. TIERNEY, Massachusetts
PATRICK J. TIBERI, Ohio			DAVID WU, Oregon
JOE WILSON, South Carolina		RUSH D. HOLT, New Jersey
TOM COLE, Oklahoma			BETTY McCOLLUM, Minnesota
JOHN KLINE, Minnesota			ED CASE, Hawaii
JOHN R. CARTER, Texas			RAU?L GRIJALVA, Arizona
MARILYN N. MUSGRAVE, Colorado           MARSHA BLACKBURN, Tennessee


                             TABLE OF CONTENTS


OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, SUBCOMMITTEE ON 
EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE 
WORKFORCE ..............................................................  2

OPENING STATEMENT OF RANKING MEMBER ROBERT ANDREWS, 
SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON 
EDUCATION AND THE WORKFORCE ............................................  3

STATEMENT OF JACK L. VANDERHEI, Ph.D., FACULTY MEMBER, FOX SCHOOL OF 
BUSINESS AND MANAGEMENT, TEMPLE UNIVERSITY, PHILADELPHIA, PA, AND 
RESEARCH DIRECTOR, EMPLOYEE BENEFIT RESEARCH INSTITUTE (EBRI) 
FELLOWS' PROGRAM, WASHINGTON, D.C.; TESTIFYING ON BEHALF OF EBRI .......  5

STATEMENT OF JOHN LEARY, ESQ., PARTNER O'DONOGHUE AND O'DONOGHUE, 
WASHINGTON, D.C. .......................................................  8

STATEMENT OF RON GEBHARDTSBAUER, SENIOR PENSION FELLOW, AMERICAN 
ACADEMY OF ACTUARIES, WASHINGTON, D.C. ................................. 10

STATEMENT OF J. MARK IWRY, ESQ., NONRESIDENT SENIOR FELLOW, THE 
BROOKINGS INSTITUTION, WASHINGTON, D.C. ................................ 12

APPENDIX A - WRITTEN OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, 
SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON 
EDUCATION AND THE WORKFORCE ............................................ 33

APPENDIX B - WRITTEN STATEMENT OF JACK L. VANDERHEI, Ph.D., FACULTY 
MEMBER, FOX SCHOOL OF BUSINESS AND MANAGEMENT, TEMPLE UNIVERSITY, 
PHILADELPHIA, PA, AND RESEARCH DIRECTOR, EMPLOYEE BENEFIT RESEARCH 
INSTITUTE (EBRI) FELLOWS' PROGRAM, WASHINGTON, D.C.; TESTIFYING ON 
BEHALF OF EBRI ......................................................... 37

APPENDIX C - WRITTEN STATEMENT OF JOHN LEARY, ESQ., PARTNER 
O'DONOGHUE AND O'DONOGHUE, WASHINGTON, D.C. ............................ 69

APPENDIX D - WRITTEN STATEMENT OF RON GEBHARDTSBAUER, SENIOR 
PENSION FELLOW, AMERICAN ACADEMY OF ACTUARIES, WASHINGTON, D.C. ........ 85

APPENDIX E - WRITTEN STATEMENT OF J. MARK IWRY, ESQ., NONRESIDENT 
SENIOR FELLOW, THE BROOKINGS INSTITUTION, WASHINGTON, D.C. APPENDIX F 
- SUBMITTED FOR THE RECORD, STATEMENT OF J. MARK IWRY, "EXPANDING 
THE SAVER'S CREDIT" ....................................................107

APPENDIX F - SUBMITTED FOR THE RECORD, STATEMENT OF J. MARK IWRY, 
"EXPANDING THE SAVER'S CREDIT" .........................................133

APPENDIX G - SUBMITTED FOR THE RECORD, STATEMENT OF JOHN LEARY, JULY 
1, 2003	................................................................141

APPENDIX H - SUBMITTED FOR THE RECORD, STATEMENT OF J. MARK IWRY, 
"DATA REGARDING LUMP SUM DISTRIBUTIONS AND THEIR USES", AND DR. JACK 
VANDERHEI, "POSSIBLE RELIEF FROM DC PLAN REQUIREMENTS FOR 
EMPLOYERS THAT SPONSOR CERTAIN DB AND DC PLANS", JULY 1, 2003 ..........149

APPENDIX I - REQUEST FOR ADDITIONAL SUBMISSION FROM RON 
GEBHARDTSBAUER .........................................................157

THIS ITEM WAS NOT AVAILABLE PRIOR TO THE OFFICIAL PRINTING OF THE 
HEARING TRANSCRIPT.  HOWEVER, UPON SUBMISSION, THE ITEM WILL BE 
MAINTAINED AND AVAILABLE FOR INSPECTION IN THE MAJORITY OFFICE OF 
THE COMMITTEE ON EDUCATION AND THE WORKFORCE

APPENDIX J - SUBMITTED FOR THE RECORD, STATEMENT OF J. MARK IWRY, 
"CASH BALANCE PENSION CONVERSIONS: A LEGISLATIVE FRAMEWORK FOR 
RESOLUTION" ............................................................159

Table of Indexes .......................................................175


                       STRENGTHENING PENSION SECURITY:

                     EXAMINING THE HEALTH AND FUTURE OF

                        DEFINED BENEFIT PENSIONS PLANS
                             ____________________

                            Wednesday, June 4, 2003


                  Subcommittee on Employer-Employee Relations

                    Committee on Education and the Workforce

                        U. S. House of Representatives

                              Washington, D. C.







	The Subcommittee met, pursuant to call, at 2:05 p.m., in Room 
2175, Rayburn House Office Building, Hon. Sam Johnson, Chairman of the Subcommittee, presiding.

	Present:  Representatives Johnson, Ballenger, Tiberi, Wilson, 
Kline, Carter, Anderson, Kildee, Tierney, and Wu.

	Staff Present:  Stacey Dion, Professional Staff Member; David Connolly, Jr., Professional Staff Member; Ed Gilroy, Director of 
Workforce Policy; Christine Roth, Workforce Policy Counsel; Kevin Smith, Senior Communications Counselor; Kevin Frank, Professional Staff 
Member; and, Deborah L. Samantar, Committee Clerk/Intern Coordinator.

Michele Varnhagen, Minority Labor Counsel/Coordinator. 

Chairman Johnson.  A quorum being present, the Subcommittee on 
Employer-Employee Relations of the Committee on Education and the 
Workforce will come to order.  I want to thank you all for being here on 
time and promptly.  Thank you.

	We are meeting today to hear testimony on strengthening pension security:  examining the health and future of the defined benefit plan.

	Under Committee Rule 12(b), opening statements are limited to 
the Chairman and Ranking Minority Member of the Subcommittee; therefore, 
if other Members have statements, they may be included in the record.

	With that, I ask unanimous consent for the hearing record to remain open for 14 days to allow Members' statements and other extraneous material referenced during the hearing to be submitted to the official hearing record.

	Without objection, so ordered.


OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, 
SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, 
COMMITTEE ON EDUCATION AND THE WORKFORCE


	Good afternoon.  And it is that, isn't it?  Today we are going 
to begin a series of hearings on the challenges that face the defined 
benefit pension system.  I will be listening with particular interest to 
the testimony regarding the pension funding crisis.  This hearing will 
build on our efforts over the last several years to enhance retirement security and expand pension coverage to millions of American workers. 
After the success in passing H.R. 1000, the Pension Security Act, that 
mostly deals with defined contribution plans, we now turn our attention 
to the issues and concerns facing the defined benefit pension system.

	Giving workers as many retirement security options as possible 
should be our goal, and we should encourage employers to offer both 401(k) accounts and defined benefit pension plans to their employees. 

	While the Committee is interested in the general structure and mechanics of the defined benefit pension plans, we are even more interested 
in examining the various complex matters that are surrounding it:  
sponsoring, funding, providing benefits under the system.

	In particular, we are concerned with the staggering decline in 
the number of traditional pension plans over the last several years.  We 
are going to examine the various reasons that plans have been frozen or terminated.  I firmly believe that over the years, layer upon layer of 
red tape and overregulation have strangled these plans and really driven 
them nearly to extinction. We will also examine the current funding issues facing many employers and plans today. 

	We should be seeking the correct level of funding for these plans, 
and we must be sure the money is available to pay for these promised benefits when workers retire.  These plans are backed up by the Pension Benefit Guaranty Corporation insurance and American taxpayers.  We need to make 
sure that United States taxpayers aren't left holding the bag for private sector promises.  However, we must be careful not to require over funding, which is an unnecessary drain of corporate resources that may cause 
employers to consider eliminating the plans altogether.

	Besides being crucial to individuals, retirement security pension plans are an important resource for employers in order to maintain their employee talent and dedication.  Today we are going to hear from four witnesses with expertise in the pension industry who can tell us about 
defined benefit plans and the health and future of the system in general.

	I am hopeful the witnesses will be able to enlighten this 
subcommittee on the role defined benefit plans play not only in providing retirement security, but in providing employers with a powerful tool for recruiting and retaining of a valuable and competitive workforce.  From the 
witnesses' testimony today, I think we will all be better able to understand the complexities of our defined benefit pension system and the challenges currently facing us today.

	The issues we will talk about today are important because we expect there will be several 
legislative proposals about pensions in the future.  One of the proposals already introduced is H.R. 
1776, sponsored by Portman and Cardin.  Some of these provisions amend ERISA and are in our 
committee's jurisdiction, as you are well aware.  And I think you are going to see that thing pop its 
nose up in the next week or two, so we need to be aware and wary.

	With that, I welcome you again, and yield to Mr. Andrews, Ranking Member on the 
Democrat side, for any remarks you care to make.


WRITTEN OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, SUBCOMMITTEE ON 
EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE 
WORKFORCE - SEE APPENDIX A


OPENING STATEMENT OF RANKING MEMBER ROBERT ANDREWS, 
SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, 
COMMITTEE ON EDUCATION AND THE WORKFORCE


	Thank you, Mr. Chairman.  Thank you for your cooperation today and 
for your continued fairness and friendship.  I thank the witnesses for their excellent preparation.  I look forward to hearing from each of you.

	I am interested in three broad questions that I hope you will touch 
on today:

	The first is how we can encourage the continued viability of defined benefit plans as a choice for both employers and employees.  I agree with Chairman Johnson.  We need a robust system in which employees have a choice 
of more traditional defined benefit plans, defined contribution plans, and 
the subset of defined contribution plans, employee directed, 401(k)s and 
others as well.  That is a very important menu that I think we have to preserve.  There is a real concern that the defined benefit part of that 
menu is diminishing.  We need to talk about why that is and what we can do about it.

	The second thing that I am interested in is the issue of the 
financial health and under funding of a number of plans, given the roiling 
of the financial markets over the last number of months and years.  One of 
the major issues for corporate America today is the immense pension liabilities they are going to have to meet and the impact that these liabilities have on the ongoing businesses, and therefore the wages and benefits of today's employees as well as the future health 
of pensioners.

	A corollary to that question is some concerns I have about the treatment of pensioners by companies that have come upon hard times.  The steel industry comes to mind as one of them.  We need to think through the questions about the fair treatment of those individuals.

	The third question, which is related to the first two but in some 
ways different, is the fact that the GAO study that Congressman Owens and I asked for several years ago indicated that nearly 70 million working 
Americans have no pension at all.  And although the subject of today's 
hearing is about improving a form of pension that already exists, I don't think you can intelligently have that discussion until you think about the 70 million Americans who have no private pension at all.  I view that subset of our working population as a ticking time bomb.

	Advances that will be made in life expectancy and health care 
will hopefully mean that many of those folks will live for a long, long 
time.  I certainly hope that they do.  But if the only asset that these individuals have is their Social Security check, if they have their Social Security check, we are, I think, on the brink of seeing a tidal wave of 
senior citizens living below the poverty line for 25, 30, 35 years. The demands that will place on our budget and on our economy are significant.  Obviously there is the important issue of the loss of dignity and the loss 
of personal standing for those individuals as well.

	So I am interested in hearing those three broad questions addressed.  I hope that the Committee will be addressing them in legislative form in the weeks and months ahead, and I look forward to hearing from the witnesses.

Chairman Johnson.  Well, thank you.  We plan on having more than one 
hearing before we try to do any legislation.  As you know, we have a number 
of new Members on both sides who aren't here, but need to be informed.

	I would like to introduce the witnesses at this time.  Dr. 
VanDerhei is a faculty member at Temple University's Department of Risk, Insurance, and Healthcare Management, School of Business and Management.  
He previously served on the faculty of the Wharton School at the University 
of Pennsylvania, and was Director of the Pension Research Council.  Dr. VanDerhei's government experience includes consulting work for the Pension Benefit Guaranty Corporation, and the Department of Labor.  He is currently the editor of Benefits Quarterly, and a member of the National Academy of Social Insurance.  Dr. VanDerhei holds bachelor and MBA degrees from the 
University of Wisconsin, Madison, and master and doctoral degrees from 
Wharton School at the University of Pennsylvania.  Thank you for being here.

	Dr. John Leary is a partner in the law firm of O'Donoghue and O'Donoghue, focusing on collectively bargained employee benefit plans, and, 
in particular, on multi-employer defined benefit pension plans.  He also serves as an adjunct professor at the Columbus School of Law at the 
Catholic University of America, and he previously served as a staff 
attorney for the National Labor Relations Board.  Dr. Leary received his 
law degree from Columbus School of Law, Catholic University of America, 
and his doctoral degree from the University of Maryland.

	Ron Gebhardtsbauer is a Senior Pension Fellow for the American 
Academy of Actuaries, was formerly chief actuary for the Pension Benefit Guaranty Corporation, the chief pension actuary in the creation of the 
Federal Employee Retirement System at the U.S. Office of Personnel 
Management, and the head of the New York City retirement practice of 
William M. Mercer, Inc. Mr. Gebhardtsbauer holds a bachelor's degree 
from Pennsylvania State University and a master's degree from Northwestern University.

	J. Mark Iwry is a Nonresident Senior Fellow at the Brookings Institution economic studies program.  Mr. Iwry served as Benefits Tax 
Counsel of the U. S. Department of Treasury from 1995 to 2001.  Prior to joining Treasury, he served as a partner in the law firm of Covington & Burling, specializing in pensions and other employee benefits, as an adjunct professor at George Washington University National Law Center, and as a 
member of the White House Task Force on Health Care Reform.  Mr. Iwry holds bachelor, master and law degrees from Harvard University.

	Before the witnesses begin their testimony, I would like to remind Members we will be asking questions after the entire panel has testified.	
In addition, Committee Rule 2 imposes a 5-minute limit on all questions.  
We have lights down there that come on when you start, and I think all of 
you are familiar with them.  Finally, we would ask you to please hold your comments to 5 minutes so we have time to ask some questions.

	And with that, I would thank the witnesses and Members for their valuable time, and ask Dr. VanDerhei if you are ready to testify, go ahead.


STATEMENT OF JACK L. VANDERHEI, Ph.D., FACULTY MEMBER, FOX 
SCHOOL OF BUSINESS AND MANAGEMENT, TEMPLE UNIVERSITY, 
PHILADELPHIA, PA, AND RESEARCH DIRECTOR, EMPLOYEE BENEFIT 
RESEARCH INSTITUTE (EBRI) FELLOWS' PROGRAM, WASHINGTON, 
D.C.; TESTIFYING ON BEHALF OF EBRI

	Thank you.  Mr. Chairman and Members of the Subcommittee, I am 
Jack VanDerhei of Temple University, and Research Director of the EBRI Fellows' Program.

	The Employee Benefit Research Institute is a nonpartisan, nonprofit research institute that focuses on health and retirement issues.  EBRI does not take policy positions and does not lobby.  Also I wish to emphasize that the views expressed in this statement are mine alone and should not be attributed to Temple University, the Employee Benefit Research Institute, 
or their officers, trustees, sponsors or other staff.

	In my written testimony I provide an overview of the defined benefit pension plan system and examine the various complex issues concerning sponsoring, funding, and providing benefits to participants and 
beneficiaries under the system.  I discuss some of the pension accounting 
concerns; attempt to put the current funding crisis in some perspective.  I also review some of the relative advantages and limitations of cash balance plans.

	I was also asked to comment on the importance of preserving single-employer defined benefit plans and would like to focus the time available 
for oral comments on this topic.  My written testimony discusses the various aspects of retirement income risks and how defined benefits plans treat each one.

	Although defined benefit plans are not necessarily more or less generous than their defined contribution plan counterparts with respect to 
the amount of wealth generated by retirement age for an individual employee, there are fundamental differences in the payout stage, at least for those 
defined benefit plans that do not offer lump-sum distributions to their employees at retirement.

	When defined benefit payouts are offered in the form of an annuity 
to all retirees, two of the risks mentioned in my testimony are retained by the employer instead of being transferred to the employee, and those are investment risk and longevity risk.  The value of the investment risk 
transfer is well known, as is the fact that defined benefit plans, at least when you are not taking them in the form of lump-sum distributions, eliminate the risk of outliving your income.  However, there does not appear to be any quantitative assessment of just how important this latter factor 
might be.

	In my written testimony I describe how the value of a longevity risk transfer is simulated for residents of the State of Massachusetts born 
between 1936 and 1965.  This is essentially the same model I used to 
simulate the impact of company stock and 401(k) plans when I testified 
before this Subcommittee last year during the Enron hearings.

	However, instead of looking at the impact of asset allocation 
choices in portfolio diversification, today I am using the model to 
simulate the amount of time an individual will be alive in retirement, 
how much they will need to spend each year, and whether they will have 
sufficient retirement income and wealth to make those payments.

	Retiree expenditures in the model are assumed to be both deterministic, which basically means the amount that you spend on things 
like food, housing, and utilities each year is assumed to be known and a function of the retiree's income, family status, and location.

	But there are also still caustic elements.  For example, in most 
years a retiree will not need to spend money on nursing home care.  
However, for years where I have simulated to be utilized, the amount spent 
on this service could be catastrophic in value for a retiree.

	In the baseline case, it is assumed that all defined benefit plans 
are paid in the form of an annuity, while individual accounts, such as 
defined contribution money like 401(k) plans and IRAs are spent as needed 
to pay the simulated expenses.

	In the alternative case, it is assumed that all individual account money is paid out in the traditional manner of a defined benefit plan.  In both cases, deficits are recorded in any year there is not sufficient retirement income to meet bad years' simulated expenses and there is not a sufficient amount in the individual account balances of retiree savings to cover the difference.

	Now, before I present the results of my findings, let me just make 
one brief mention of how I handled what is sometimes a retiree's most important asset, the value of his or her house, less any remaining mortgage.

	The value of net housing equity, if any, can make a significant difference in retiree's ability to meet expenses later in life.  However, there appears to be no consensus of opinion on when, if ever, retirees are going to liquidate the equity in their house or in what form.

	Therefore, the model produces three different scenarios with respect to housing equity.  In the first one, the retirees are assumed to never liquidate their housing equity.  Secondly, retirees are assumed to annuitize housing mortgage immediately upon retirement.  For example, they will go 
out and purchase a reverse annuity mortgage.  And thirdly, retirees are assumed to liquidate the housing equity only when needed to pay expenses and keep the proceeds as a lump-sum.

	Well, whether longevity risk transfer inherent in a standard type 
of benefit plan design will have value to an individual employee will 
obviously depend, among other things, on their actual life span.  As this 
is not going to be known in advance, the analysis measures the lifetime deficit reduction, simulated to occur when all retirement plan wealth is assumed to be paid out under defined plan-type annuity, and pools results across all members of each birth cohort.

	Figures 8a and 8b, which are the last two pages of my written testimony, show you the value of longevity transfers for single males and single females respectively.  As you will see, in all cases the defined benefit plan design results in a positive reduction; in other words, 
retirees are running out of money less often and with less catastrophic results.  In percentage terms, the results vary from a low of 8 percent to 
a high of 26 percent for single males, and from a low of 4 percent 
to a high of 14 percent for single females.

	Mr. Chairman, I know this is a complex topic and there are many factors that affect the future viability of the single-employer pension system.  But I would suggest one of the key values in the defined benefit system is that it transfers the risk of outliving your assets from the individual to an employer that can pool this longevity risk across a large number of employees.  That factor should not be ignored in the public policy debate over retirement income security.

	Thank you very much, and I look forward to answering your questions later.




STATEMENT OF JACK L. VANDERHEI, Ph.D., FACULTY MEMBER, FOX SCHOOL OF 
BUSINESS AND MANAGEMENT, TEMPLE UNIVERSITY, PHILADELPHIA, PA, AND 
RESEARCH DIRECTOR, EMPLOYEE BENEFIT RESEARCH INSTITUTE (EBRI) FELLOWS' 
PROGRAM, WASHINGTON, D.C.; TESTIFYING ON BEHALF OF EBRI - SEE APPENDIX B


Chairman Johnson.  Thank you, sir. 

	Mr. Leary, you may begin.

STATEMENT OF JOHN LEARY, ESQ., PARTNER O'DONOGHUE AND 
O'DONOGHUE, WASHINGTON, D.C.

	Thank you, Chairman, Ranking Member Andrews, and Members of the Committee.  I want to highlight a few of the points that I addressed in 
more detail in my written submission dealing with multi-employer defined benefit plans.  

	These are plans which are entered into as a result of a collective bargaining agreement between a labor organization and a group of employers.  Could be a large group, could be a relatively small group, could be nationwide. That agreement requires contributions to be made by 
the contributing employers into the defined benefit pension plan; 
contribution is then pooled, invested, and paid out within terms of a 
formula set out in the plan of benefits.  The amount of contributions 
going into these plans is fixed by the collective bargaining agreement, 
which is an agreement which may last as many as 5 years, commonly 3 years.  
In other words, the income stream into these plans is fixed.

	Historically, these plans have been stable.  They have, in somewhat 
of a contrast to single-employer plans, expanded in terms of the number of participants that they cover.  They have had a very good history in terms 
of not having to be salvaged by the PBGC.  Only 31 multi-employer plans throughout the history of the PBGC have had to be salvaged, and the assets 
of the PBGC multi-employer program have remained positive for approximately 
a quarter century, currently about $158 million.

	You can see that these plans historically have been, at least up 
to now, healthy plans.  However, there is a serious threat confronting these plans, and that is their ability to meet their minimum funding obligation.  This is an obligation which requires multi-employer defined benefit plans to have sufficient assets to be able to pay benefits when they become due in 
the future.  It has been a hallmark of ERISA, probably been the single 
biggest reason why ERISA was enacted. And multi-employer plans up to now 
have not had a problem doing that.

	One part of this complex mechanism for funding these plans, in calculating whether they meet their minimum funding obligation, has been to estimate the rate of future revenues in terms of investment return, and also to deal with how to amortize over time the investment experience that the plans have already had.

	If there is, and this I believe is a very important point, a 
failure by a multi-employer plan to meet its minimum funding obligation, liability for that runs to all of the participating employers.  
They will each have to pay their proportionate share of the shortfall.  In addition, each employer, under the Internal Revenue Code, will be liable for paying a penalty of 5 percent of the amount of their extra contributions.  That can rise to 100 percent if the deficiency is not cured within the 
correction period.

	Keep in mind that this penalty arises even though all of the multi-employers who have contributed to the multi-employer plan have met all of 
their contractual obligations, they have paid in all of the money that they have been obligated to under the collective bargaining agreement.  Simply 
put, with this as a possibility, the solvency and the survival of these plans is somewhat jeopardized.

	Ordinarily and historically this has not been a problem, but 
starting in 1999, as you are undoubtedly well aware, with the dramatic 
decline in the equities markets, these plans have experienced an 
unprecedented amount of loss.  Literally in the lifetime of any multi-
employer plan, it has never had three consecutive negative years of 
investment return, but that is exactly what has happened since mid-1999.

	As a result, as they look down the road, which they are required to 
do by ERISA and by the Internal Revenue Code, these plans see that a minimum funding shortfall could occur and these sanctions, these liabilities could arise.  So how are plans going to deal with this, and how are the actors in these plans going to deal with this?  

	Under the law as it is currently set up, I think it is safe to anticipate that there are going to be a lot of behaviors that will cause 
harm to multi-employer plans.  Most commonly I think what we can envision happening, is that employers to multi-employer plans, as they look down 
the road and they see that perhaps in 4 years I could have significant liability for making up this minimum funding shortfall, those employers 
could very reasonably and very understandably decide, "I don't 
want to participate in this plan any further.  As soon as my collective bargaining agreement expires, I am out of here.  I am going to withdraw 
from the plan or not renew a bargaining agreement requiring contributions 
to the plan."

	Trustees, as they look at this problem, are equally committed to trying to avoid it.  I certainly see it as imaginable although imprudent 
for trustees to look to investment strategies which might bring in more 
money but also would certainly bring in more risk.

	Once those types of behaviors happen, and particularly once an employer starts to leave, you are going to have a number of negative consequences:  First of all, of course, the income stream lessens.  
Fewer employers are contributing to the plan.  Second, an increased 
liability gets to be imposed upon the remaining employers.  Third, the possible new employers that all of these plans need to survive are not 
going to be attracted to this plan.  It is simply going to be a rational 
decision by an employer not to enter into a plan if I have possible, significant liability for benefits.

	As a result, these plans are going to experience a significant 
funding shortfall.  Section 708 provides some relief for that provision by allowing the amortization of investment losses to be extended from 15 to 30 years.  It would eliminate, in my view, a number of these negative 
consequences.

	Thank you very much.

STATEMENT OF JOHN LEARY, ESQ., PARTNER O'DONOGHUE AND O'DONOGHUE, 
WASHINGTON, D.C. - SEE APPENDIX C


Chairman Johnson  XE "Chairman Johnson"  .  Thank you.  I appreciate you shortening it up there at the end.  Lawyers like to talk.  I understand.  
That is okay.
	
	Mr. Gebhardtsbauer, you may proceed now.  Thank you.


STATEMENT OF RON GEBHARDTSBAUER, SENIOR PENSION 
FELLOW, AMERICAN ACADEMY OF ACTUARIES, WASHINGTON, D.C.


	Thank you, Mr. Chairman, Ranking Member Andrews, and distinguished Members of the Committee.  Thank you for inviting us to testify today on defined benefit plans.  My name is Ron Gebhardtsbauer, and I work for the American Academy of Actuaries.  We are the nonpartisan professional organization for all actuaries of all practices in the United States.

	DB plans are an essential element of retirement security along with 
DC plans.  While younger employees understand and value the cash nature of DC plans, older employees and retirees will tell you that cash does not bring retirement security; a stable DB pension for life does.  Thus there are advantages to having both types of plans.  So many large employers have 
both, a DB plan and a 401(k).

	Workers appreciate their 401(k) plan when the stock markets are 
doing well, but when stock markets go down they prefer their DB plans.  And employers provide retirement plans not only for altruistic reasons, but also to help them maintain their workforces and because they have tax advantages.  And the nation benefits by having a huge source of efficiently invested 
assets in our economy.

	In my written testimony I provide many of the advantages of DB 
plans, so I will just give a few here.  For employees, DB plans are more likely to provide a stable income for life.  Employees wouldn't have to 
worry about a bear market when they retire or right after they retire.  And they won't have to worry about running out of money.  For employers, DB 
plans provide design and contribution flexibility, although employers would like to have more flexibility in the contribution area, in good years to contribute more, and less in difficult years.  And for the Nation, DB plans 
help reduce poverty rates better at old ages.

	With all of these advantages, you would think that DB plans would predominate.  Unfortunately, that was only true in the past.  There has been 
a dramatic trend away from DB plans towards 401(k)s.  In the 1970s, as you will see from the chart over to my right, 40 percent of the private sector workforce was covered by a DB plan.  That is the blue line going down. 
Now it only covers about half that, or 20 percent.  And DC plans now predominate, the purple line going up.  Those are primarily 401(k) plans.  
So the remaining DC plans are only at 12 percent.  They are falling further.

	Why did this happen if DB plans can mimic a DC plan?  A major 
reason is that DC plans can have features that DB plans cannot have.  So 
how can Congress help DB plans to be more competitive?  One way would be 
to allow DB plans to have some of those features that 401(k) plans can have.  And that way employers would then be able to choose what is best for them 
and their employees.  For instance, Congress could allow a DB plan to have pretax employee contributions.  Right now they can't.	Same thing.  They could allow DB plans to have employer matching contributions, just like the 401(k), but DB plans can't.

	In my written testimony, I suggest applying other 401(k) rules to 
DB plans, such as allowing phased retirement to create a more level playing field.  People are calling this idea the "DB(k)" idea.

	Another reason that choice is biased is that the rules for DB 
plans are much more complex and costly for DB plans.  For example, in the 1970s, the administrative costs for a DB plan were less than for a DC plan.  But now they are 50 percent more for the DB plan, and according to a Hay 
Group study, it was because of laws and regulations.  In addition, finally, 
DB laws and regulations have not kept up with new plan designs and with the changing economy.

	For example, unusually low Treasury rates have made pension contributions much larger than intended.  And a congressional fix expires 
this year.  Decisions are being made daily to freeze and terminate pension plans for cost reasons right now.  So a permanent fix is needed soon and 
immediately.  It is unfortunate though that we haven't solved this already, since the major players are so close.

	A proposal under consideration in the Senate last month suggested using 100 percent of a conservative corporate bond index.  An administration official testified in April that they also liked the corporate bond rate, 
but they were considering using a yield curve instead of just one average 
rate for all plans.

	However, a curve adds much complexity, without really changing the numbers much, when other best practices are used. Therefore, you might want 
to convene a summit on this issue with interested parties to iron out some 
of these small differences between the parties.  It is important that 
Congress act soon on these issues, particularly the Treasury rate fix, as employers need to know now what next year's contribution is going to be.  
In addition, we need to fix the other rules soon so that employers don't 
give up on their DB plans.

	The earliest baby boomers have already started to reach retirement age.  Let's create rules and laws so that they can have a more secure retirement.  Thank you for this opportunity to speak before you.  I will 
be ready for questions when you have them.


STATEMENT OF RON GEBHARDTSBAUER, SENIOR PENSION FELLOW, AMERICAN 
ACADEMY OF ACTUARIES, WASHINGTON, D.C. - SEE APPENDIX D


Chairman Johnson. Thank you, sir.
	
	Mr. Iwry, you may proceed.

STATEMENT OF J. MARK IWRY, ESQ., NONRESIDENT SENIOR 
FELLOW, THE BROOKINGS INSTITUTION, WASHINGTON, D.C.


	Thank you, Mr. Chairman, Ranking Member Andrews, distinguished 
Members of the Committee.  I would like you to bear in mind, if you would, 
two basic points as you consider the issues before you today.

	The first is that the tax-qualified pension system needs to do more 
to give the taxpayers their money's worth.  Treasury estimates that we spend about $192 billion in foregone taxes in order to subsidize pensions.  Of that, 92 billion relates to 401(k)s and IRAs, and the other 100 billion to 
employer-funded plans, both defined benefit and defined contribution.  This means that the taxpayers obviously have a major stake in the private pension system, much like a private investor in a business transaction who has made 
a substantial equity investment and expects a reasonable return on that investment.

	For the taxpayers the interest in ensuring that their money is used efficiently and for its intended purpose, in other words a good return on their investment, is to provide retirement security to those who need it the most. Unfortunately, moderate and lower-income households are  disproportionately represented among the roughly 70 million people that you referred to, Mr. Andrews, as being excluded from the private pension system.

	It has been estimated that about 80 percent of people with earnings over $50,000 a year are covered by an employer plan, while fewer than 40 percent of people with earnings of $25,000 or under are covered.  And when they are covered, the moderate and lower-income people are likely to have disproportionately small benefits.  When they are eligible to contribute to 
a 401(k), they are more likely not to contribute.  And very few contribute 
to IRAs.  So the distribution of benefits in our system, both the retirement benefits and the associated tax benefits, is tilted upward.

	Providing security for the moderate and lower income workers should 
be the first policy priority of our system, not only because public tax dollars need to be devoted to enhancing security in retirement as opposed to affluence in retirement, but also because this is efficient.  Tax 
expenditures that are of use mainly to higher income people tend to generate shifting of other savings from non tax-favored over to tax-favored uses; whereas tax incentives that are targeted to lower and moderate-income workers tend to increase net savings because these people have less savings, if any, to begin with.

	Let me recall for the Subcommittee one key reason why the system 
isn't doing more to cover moderate and lower-income people.  The juice in our system, the tax preferences, is structured in such a way that they have to 
do with one's marginal tax rate.  If, like three-quarters of the working population, your tax bracket is 15 percent, 10 percent, or zero, you pay payroll tax but you don't owe any income tax.

	The tax-favored treatment of pension contributions, whether it is 
DB, DC, 401(k) or IRAs, is worth very little to you.  By contrast, if you 
are in a high marginal tax rate, it is worth quite a lot.

	My second point is DB plans are valuable and important, but the preservation of defined benefit plans is not the most important thing at stake.  The DB/DC distinction should not be the main focus, because the 
larger issue is whether as a nation we are stepping away from the 
employer-based pension system as a whole, DBs and DCs alike, in favor of a 
do-it-yourself approach that is based on individual accounts.

	An employer system can be a powerful way of achieving broad coverage, as illustrated by the many large defined benefit plans that cover millions 
of individuals and provide meaningful benefits to them.  The system tends to have cross-subsidies that use the interest of higher-income, higher-bracket taxpayers to encourage their more reluctant coworkers who are in lower tax brackets to go ahead and save.

	Employer contributions tend to work because they provide automatic coverage, actual benefits, as opposed to just the opportunity to save and 
get benefits.  So the more pertinent distinction is between pensions and individual savings.  By pensions, I mean employer-sponsored plans or 
multiple employer or other collective arrangements that actually deliver retirement benefits, be they defined benefit, profit sharing, money 
purchase pension, stock bonus, including employer contributions to 401(k)s 
and benefits that are targeted to retirement income as opposed to only an account balance that people can consume early on in their careers.

	DB plans have been losing out, as my colleagues have said, not to 
DCs in general, but to 401(k)s.  And 401(k)s can leave people behind.  
401(k)s play an important and constructive role in our system.  And certainly those that retain the incentive structure that makes the employer want to 
encourage the average workers to save in order to provide more savings opportunities for the higher income pursuant to the nondiscrimination test 
in the 401(k); those play a particularly constructive role.  But a fairer 
and more effective distribution of benefits to increase both 
retirement security and national savings calls for us to encourage employer contributions first and foremost.

	Thank you, Mr. Chairman.  I am happy to enter into discussion and 
take questions.


STATEMENT OF J. MARK IWRY, ESQ., NONRESIDENT SENIOR FELLOW, THE 
BROOKINGS INSTITUTION, WASHINGTON, D.C. - SEE APPENDIX E



Chairman Johnson.  Thank you, sir.  We appreciate your testimony 
as well.
	
	Mr. Leary, I might ask you, don't multi-employer plans have a different funding rule from a single-employer plan, and are there any 
single-employer funding rules that allow those plans to average loss over 
15 years or 30 years even?  And I believe section 708 of the Portman-Cardin bill would allow multi-employer plans a one-time advantage to average loss over 30 years.  Why should multi-employer plans be given such a big 
advantage over single-employer plans?

Mr. Leary.  Thank you, Mr. Chairman.  Originally, my recollection is that 
there was a 15-year amortization period for experienced gains and losses in ERISA for both single-employer plans and multi-employer plans.  That was changed primarily because of the PBGC's strong feeling that the single-employer plans needed to be distinguished, and a shorter period was 
appropriate for single-employer plans which tend to be, on the whole, less stable than multi-employer plans.  So that responds to the first part of 
your question.

	In regards to why should multi-employer plans get a more favorable, longer amortization period than single-employer plans, a single-employer 
plan always has the opportunity, if it meets a potential funding shortfall, for the employer in his capacity as plan sponsor to contribute additional 
amounts into the plan.  The only restriction that the employer would run into would be he could not contribute so much that he would hit the maximum 
funding limitation ceiling and lose the ability to take a tax deduction on these contributions, but the employer is, in a way, in control of the purse 
strings as the plan sponsor.

	In a multi-employer plan, the trustees, the sponsors of the plan, 
do not control the purse strings; the purse strings are really controlled by the bargaining parties, and the trustees deal with the money that comes from the bargaining parties in these bargaining agreements.

Chairman Johnson.  You are talking about union plans.

Mr. Leary.  Yes.

Chairman Johnson.  Which are only, in my view, about 70 percent 
funded. Is that true?

Mr. Leary.  I believe that the figure is in fact higher.  I believe that 
they are better funded than that.  I don't have the precise number.  

	A problem which the multi-employer plans confront is if they run 
into a shortfall, they do not have the ability to put additional money in because the amount of the money coming in is already fixed by the 
bargaining agreement.  And it is very unlikely that an employer or a group 
of employers would be willing, say, in midterm of a 5-year bargaining agreement, to agree to make additional contributions.  So that lack of mobility that multi-employer plans have is a primary 
reason.

Chairman Johnson. Yes, but when they make the agreement, the union agrees 
to put in "X" amount of dollars and hold the plan at a certain level, and 
they don't do that.  Is that true or false?

Mr. Leary.  Well, first of all, Mr. Chairman, the union does not agree to 
make any contributions.  With the "multis", all of the money comes from the employers.  So they are the sole contribution source.

Chairman Johnson.  But do they put it all in that pension plan, as 
agreed?

Mr. Leary.  Yes.  All of the money goes into the plan.  And then the 
administration of it is handled by a group of trustees, equally derived 
from the union side and the management side.

Chairman Johnson.  So what happens when you get a shortfall?  Because, you know, under our Federal rules, we require companies to maintain plans up 
to a certain level.  And you admitted that even though the 30-year bond 
rate went away and hurt us, we are still using a rate to keep the pension plans fully funded.  Companies have to do that.  Why don't unions?

Mr. Leary.  The 30-year bond rate is not in effect for multi-employer plans 
and it never has been, Mr. Chairman.

Chairman Johnson.  Okay.  Thank you for that information.

	By the way, Portman, Cardin, and I wrote a letter to the Treasury Department two years ago and asked them when they were going to determine 
a rate.  They still haven't answered us.  So what I think you may see is 
that the Congress may decide to do something on its own.  I hope we can 
solve that problem.  And also you know as well as I do, it is hard to find 
a defined rate that everybody is agreeable to.

	Thank you.  My time is up.

	Mr. Andrews.

Mr. Andrews.  Thank you.  I thank all of the witnesses for excellent 
presentations.  I want to start with Mr. Leary.

	You acknowledged the fact that we have had this 3-consecutive-year downturn problem.  And you have embraced a solution of a one-time option to 
go to a 30-year amortization of that loss rather than 15-year.  Is that correct?

Mr. Leary.  That is correct.

Mr. Andrews.  What happens if we have another 3-year downturn?

Mr. Leary.  The first point to make about that is that the 3-year downturn, 
which hopefully we are coming out of based on first quarter returns which 
have been better, had been unprecedented.  We haven't had one for 60 years.  So history gives us a certain degree of hope but obviously not a guarantee.

	Probably the most important thing that is going to come out of this extension of the 15-year amortization period to 30 years is it gives these multi-employer plans more time to address this problem.  And I think you 
are going to see multi-employer plans respond to this, and even if this 
relief is granted, you are still going to see plans, I think, reduce 
benefits.

Mr. Andrews.  My concern is that any way you look at this, the extension 
of the amortization period is a way to borrow against future earnings to 
cover the 3-year shortfall.  And you know what, if it is a 3-year shortfall that is going to work out fine.  But none of us knows whether this downturn 
is going to be replicated in the near future.  I am concerned about the fact 
that we might simply be postponing a far deeper crisis by permitting that to happen.  I don't know whether it will or not, nor do you.

	But I do worry about a much greater shock to the system if we had, 
you know, seven bad years out of nine, and we are borrowing in the future 
that way.  How do you respond to that?

Mr. Leary.  If this relief comes I think that multi-employer plans are still 
going to have serious underlying problems.  What the relief gives is time, 
not money.  What these plans need is money.  I think you are going to see multi-employer plans look at the design of their plans, look at possible reduction in benefits, look at reductions in the rate of future accruals, 
look at possible increases in contribution streams, and look at the possibility of bringing in new employers. I think they are going to be doing all of these things.  I think they are going to be able to do them better, particularly if you think about that in terms of cutting of benefits.

Mr. Andrews.  And in terms of a less urgent environment.

	Mr. Iwry, a two-part question for you.  What do you think the most effective way would be for us to use the tax incentive that you talked about to gain more coverage for the 70 million or so who have no pension, number one?

	And, number two, what suggestions do you have for us outside of the use of the existing tax incentive that might expand coverage?  I know that 
you were centrally involved in the saver's credit that was enacted in 2000.  And I appreciate your involvement in that.  What ideas do you have for 
us there?

Mr. Iwry.  Well, first, Mr. Andrews, I think that that saver's credit needs 
to be expanded.  It was proposed in a much more robust form.  And I think 
you have advocated that it be expanded in proposed legislation that you 
have submitted and I hope you will resubmit this year.

	The saver's credit is basically intended to be a "win-win", as you know.  It corrects the imbalance in the tax brackets that applies to retirement savings incentives by giving people who are in the zero percent bracket or in the 10 or 15 percent bracket a tax credit so that they get 
more proportional benefit from savings.

Mr. Andrews.  Sort of like an employer match, subsidized by the Federal 
Government?

Mr. Iwry.  Exactly, just like all of the tax benefits are 
in a sense like an employer match.

Mr. Andrews.  That is because many of the folks who would be in this 
bracket don't work for an employer that can afford an employer match, typically.  They are in low-margin industries, or thin-margin industries.

Mr. Iwry.  Exactly, so this encourages new plans, because it provides a 
match that a small business might not otherwise be able to provide on its 
own.  That helps when it sees that the government is willing to step in 
and provide the match.  Without this in a sense, to follow your analogy, 
the tax deductions and the tax exclusions that everybody gets on their retirement savings are like a government-provided employer match that are 
at a much higher rate.

Mr. Andrews.  How can we make better use of that $192 billion to stretch 
coverage further then?

Mr. Iwry.  Well, for one thing, I think we need to take this saver's credit idea and build on it. That is, provide for more tax credit rather than deduction-based incentives so that the system is more equitable and actually encourages more saving, because there are more moderate- and low-income 
people that are involved, and we penetrate that 70-million-person half 
of the population of the workforce that is not now covered.

	We can also do more to encourage employer or automatic contributions.  There have been proposals for a tax credit which I had been involved in when 
I was at Treasury for employer matching contributions and non-matching contributions that represent high-quality coverage.  In other words, that 
are targeted to people who are not highly paid, that are quickly invested, that involve covering everyone in the workforce except very high turnover folks, that are not leaky, but don't let the money be used for other 
purposes early in people's careers.  That is the kind of contribution that 
we want to try to encourage in our system.

	And I think if we look behind the labels, defined benefit, and 
defined contribution, to the actual specific attributes of what it is that 
we are encouraging with our tax favored treatment, we will be a lot more effective.

Mr. Andrews.  I see that my time is up.  

	Mr. Chairman, I make two requests.  One is would Mr. Iwry expand 
his remarks for the record in writing.  

	And to all of the witnesses, I would ask you to submit in writing, 
if you would, your thoughts about a proposal that Chairman Boehner and I 
have talked about at the Full Committee level, which is taking employers 
that have robust defined benefit plans presently, and giving them 
some regulatory relief or safe harbor-type treatment from some of the new requirements on defined contribution plans where they have both.

	This is the employer who has both a DC (defined contribution) and 
a DB (defined benefit), and almost as a reward for having a robust DB plan, the DC would be regulated in a slightly less onerous or difficult way.  I would be interested in the thoughts of the panel on that.

Chairman Johnson.  Thank you.  We would appreciate your comments on that.  
I hope you all don't mind forwarding that to us.

	Mr. Ballenger, you are recognized for five minutes.

Mr. Ballenger.  Thank you, Mr. Chairman.  As a fellow who has had a 
defined benefit plan that I changed to a defined contribution plan, that 
I changed to a 401(k), that I changed to an ESOP, and the IRA was in there 
at one time or another, it seems like every time I was getting something settled, the government would come in and screw it up.

	So one thing I would like to ask Mr. Gebhardtsbauer have the 
defined benefit plan costs tripled because of ERISA?  Why have those costs 
of operation tripled?

Mr. Gebhardtsbauer.  There are lots of reasons.  If I got out my 
original ERISA, it is that big.  And now I get out my law and regulations, 
and it is this big.  That is just the laws and regulations.  We have court cases.

Mr. Ballenger.  That is the reason I don't have that those plans any 
more.

Mr. Gebhardtsbauer.  In addition, we have additional laws now 
that we didn't have back then.  And sometimes they conflict.  Sometimes 
you have things like age discrimination rules, and they conflict with rules that say you can't favor the highly paid.  It is more likely that the older employees are also the more highly paid, and the ones with more service.

	So it is very difficult sometimes to figure out how you can make 
sure you comply with all of these rules.  Some of the concern that I am talking about now is that you have rules on the DB side, and you don't 
have them on the DC side.  Or you have things that you can do on the DC 
side that you can't do on the DB side.

	So a lot of these rules have good reasons for them.  And you want 
to maybe keep the intent of some of these rules, but maybe there are ways 
to simplify them.  As I mentioned in my testimony, too, some of the rules haven't kept up to date.  It is easier to keep the defined contribution 
rules up to date, because I think we understand the defined contribution 
rules a lot better.

	But the defined benefit area is much more complex.  So it is hard 
to figure out how to keep them up to date and reflect the new economy, 
lower interest rates, or the new kinds of pension plans.  For instance, 
the cash balance plan is an employer attempt at creating a plan that is similar to the DC or 401(k) plan.  And some of the ideas that Mark Iwry 
just brought up only apply to the DC side.  So, for instance, the credit 
that encourages the low-income people to put their 401(k) contribution in, 
you could also do that in the cash balance area to encourage employees, if 
it was allowed, to contribute to the cash balance plan too.  But, right now the rule is only on the DC side.

Mr. Ballenger.  Right, I understand.

	I think it was Dr. VanDerhei who mentioned homeowners.  Do you have any data as to the percentage of retirees who own their own homes, and what the average equity would be?  Is there any kind of study that has got information like that?

Dr. VanDerhei.  Yes, sir.  Actually we have done studies now for two 
states; specifically, Massachusetts and Kansas.  And the one thing I can 
tell you is that any general number I would give you would be meaningless, because there is so much geographical variation.  I would be more than 
happy to forward the information that we have collected on it by 
geographical area.

	We have it both as far as percentage that has housing equity and 
what its value is.  We also have the distribution.  And probably, most importantly, we have it by family status and gender.  And it is the single females in the both the states of Kansas and Massachusetts that we ran the 
simulations for that are definitely the target group most at risk, 
primarily because they have very little housing equity in addition to some 
of the other things we have talked about today.

Mr. Ballenger.  I realize that I am in a strange situation, but do any of 
you have an explanation for the stupid rule that states when you get to be 
72 the government tells you how long you are going to live, and your 401(k) and your IRA and your ESOP all have to be liquidated according to their schedule?

	Can someone tell me the reason for that?

Mr. Gebhardtsbauer.  I think it is to ensure that the pension 
money is used for retirement.

Mr. Ballenger.  They tell you to take it all.

Mr. Gebhardtsbauer.  Right.  People are living a lot longer than 
they did when that rule was created.  So some suggestions are to raise 
that age up to a higher age.  And a lot of actuarial studies have been performed on when is the right time to buy an annuity.  They now say, 
back when the average life expectancy was 65, such as when we were 
creating Social Security, it made sense to buy an annuity then.

	But today, they say it is more efficient to buy annuities at 
later ages.  Sometimes those rules that say that you have to start taking distributions out of your plan force people to start taking it before it 
would make sense, for instance, to buy an annuity.  But then, of course, 
if we defer that to age 70 to 75, that means for a while there will be a temporary period where there will be less revenues coming into the 
government.  So it is difficult to make that change.

Mr. Iwry.  Mr. Ballenger, may I add that the purpose of the rule, as Mr. 
Gebhardtsbauer said, is to try to ensure that the tax-favored treatment 
that was given to these contributions during your whole career really 
goes to its intended purpose of retirement security rather than estate planning.  Not that there is anything wrong with estate planning, but 
the purpose of that tax break was retirement security, not passing it 
on to one's heirs.

	The rule, therefore, doesn't actually require people to spend, 
as you know, the money; it is just that you have to shift it out of your 
IRA or qualified plan account into your taxable account.  It can be with 
the same financial provider.  It is just that the government wants to see 
that you are using that part of your assets for retirement security.

Mr. Ballenger.  Some of us are still working past that age.  You just put 
that money right on the top of salary and it throws you into the next tax bracket.

Mr. Iwry.  We changed the law a few years ago to make sure that if you are 
still working for an employer, past that age, you can postpone that payout.  You can wait until you actually retire before you have to pay it out.  
When I was at Treasury, we also liberalized that rule in response to the 
kind of concern that you are expressing; that is, because people are paying much more in health care costs later in life, long-term care costs and so 
on. We liberalized the rule, and we simplified it so that you don't have 
to take out as much.  Again it is not taking it out; it is just moving it 
into taxable accounts. Congress is now proposing to do more, and that could 
be done.

	But another way to structure that is just to exempt people with 
small accounts from that rule.  Anybody under $50,000, which is a majority 
of the population, wouldn't have to comply.  They are not the estate planners in the first place.

Mr. Ballenger.  Thank you, Mr. Chairman.

Chairman Johnson.  Thank you.  

	Mr. Kildee.

Mr. Kildee.  Thank you, Mr. Chairman.  My question is going to be rather 
specific and maybe provincial.  The largest employer in my district by far 
is General Motors.  And they have had a retirement plan for their hourly workers at least since 1950.   Mr. Kildee"   And General Motors, earlier this year, announced that the cost of its unfunded pension will triple to 
$3 billion in 2003 compared to $1 billion in 2002. You are probably familiar with that, Mr. Iwry.  

	Can GM address, and also acknowledge that their earnings will fall about 26 percent because of that increased funding?  Can GM address this without any governmental intervention or without any changes in our law?  
Or are there some changes in our law that might be of assistance 
for corporations like General Motors and specifically for General Motors?  

Mr. Iwry.  Mr. Kildee, I don't think that GM, or companies in a similar 
situation, should have to address that without intervention from the government, because I think that the current situation is not tenable and 
is not fair to employers or employees.  

	The funding rate, as people have discussed, is based on 30-year Treasury bonds which Treasury has stopped issuing, as you know.  We have an anomaly in our system now that we have got a discount rate that measures the companies' liabilities in a way that is causing those liabilities to 
increase artificially because the discount rate doesn't work anymore.  It doesn't reflect what it is supposed to reflect since the 30-year Treasury 
has been disappearing, and Treasury has bought back debt during the time 
when we had surpluses.  So that market just isn't working and we need to 
fix it.

	I endorse my colleague's recommendation that this be fixed promptly.  You referred to a summit.  I think that is a great idea, something like that involving this Committee and the other committees of jurisdiction.  I would suggest that this be done this month, if at all practical and convenient for the Members, because companies need relief promptly.  And the technical 
issues between the Treasury's preferences as to how to solve this and industry's preferences can be worked out, I think, among technical experts under the guidance of the Members and the Executive Branch.

	At the same time, if I can just add, that interest rate, as it is adjusted and set to some new benchmark that is higher than the 30-year Treasury, does not need to apply to lump-sum calculations in the same way.  That is, when you figure out how much an employee is entitled to 
get if he or she takes their pension as a single-sum payment, or whether the employer is entitled to cash out someone involuntarily if their lump-sum is very small, that interest rate has been different, has been lower than the funding interest rate for years.  And I suggest that it continue to be lower.

Mr. Kildee.  I appreciate your answer, and maybe this summit idea or 
Treasury somehow issuing or maybe responding to our inquiries would be important, because for my district, I mean, both the stability of the 
pension fund is important as is the profitability of General Motors.  They 
are the ones who provide the jobs in my district, so I am concerned about 
both things.  I talked to Rick Wagner of General Motors and I know he is 
very concerned about this.  And I appreciate your response and will pursue that further.

	Thank you very much.

Chairman Johnson.  Thank you for your comments.  I think we all 
agree that that is a significant problem that needs to be addressed fairly quickly.  And I hope that, as slow as the Congress is, maybe we will get it done this month.

	Mr. Kline, you are recognized for five minutes.

Mr. Kline.  Thank you, Mr. Chairman, and thank you to all the witnesses for 
coming today.  It is fascinating testimony, and I really enjoyed the 
questions and answers.

	As a military retiree, I suppose I am the beneficiary of a pretty solid, defined benefit plan, and I have some great confidence in the 
solvency of the employer who is providing those benefits.  The discussion 
here today seems to be hinging on the solvency of these defined benefit 
plans and how they are computed.  And I was struck first I think, Mr. Gebhardtsbauer, you talked about the 30-year Treasury, the Chairman picked 
it up, Mr. Kildee and so forth.  Could you help me understand what the 
problem is in these plans that are related to Treasury rates?  Just sort of get to some basics for me?

Mr. Gebhardtsbauer.  Great question.  I have a chart over to my 
right that shows how, when Congress initially put the rule in on Treasury rates, Treasury rates were very high.  They were way up in the double digits, much higher than actuaries were assuming for long-term expectations.  As you can see, though, all interest rates have fallen a lot, and some of it is 
due to exactly what Mark Iwry mentioned earlier. That is that we had a surplus in the late 1990s, and eventually at least the CBO projections in the late 1990s said that we were no longer going to have debt.  And so interest rates fell, and Treasury rates fell faster than corporate bond rates.

	If you look over at that chart, you will notice that it is pretty 
hard to see, but the maximum interest rate permitted by law in the past actually was very close to the corporate bond rate.  And so if you really 
want to stay with what the original law stated, you would want to keep it 
back there where the corporate bond rate is.  So even though it was based on the Treasury rate, it was initially 110 percent of the Treasury rate, and 
that got you close to corporate bonds.  

	But then Treasury rates fell so low that when you applied this 
formula you got a number and actuaries can no longer use an interest rate 
even anywhere close to corporate bond rates.  In fact, it was less than the interest rates that insurance companies were using to price annuities.  In 
other words, you had to put more money into that pension plan than you really needed.  You could have bought an annuity for everybody and still had leftover money, and still the government would say you need to put more money in there.

	So some of the reasons now are because people are getting out of the stock market.  Even though we don't have government surplus anymore, people are getting out of the stock market and moving to Treasury bonds.  And again interest rates kept going lower.  So the law is forcing these interest rates to be much lower, which forces contributions to the pension plans to be much higher than necessary.  And so this temporary fix got it back up to corporate bonds, but the temporary fix is gone by the end of the year.  And in fact, decisions have been made in courts already saying that, for instance, U.S. Airways can't afford its pension plan any longer.  And part of that decision was can they afford next year's contribution?  And it didn't look like they could.

Mr. Kline.  So, you are proposing then that we adopt a corporate bond rate 
in an official way?  That this Committee should be addressing that?

Mr. Gebhardtsbauer.  The economy actually doesn't take a 
position on exactly what it should be.  In fact, you will see some of the material on this in our paper and indications to a paper that we have had before.  

Mr. Kline.  You must admit that it is difficult.

Mr. Gebhardtsbauer.  In the chart we have recommended it to be somewhere 
in the range of between an annuity rate and a corporate bond rate.  And this rate that was proposed recently by a Senator in a bill was in that kind of range, and Treasuries in that range, when they talk about using a corporate bond rate.

	The reason why the economy doesn't pick a particular solution is because there is a tension there between benefit security and benefit adequacy.  And that is not a decision to be made by the academy, but more appropriately lies with Congress to balance these issues.  But a corporate bond would be in that range that we have been talking about.

Mr. Kline.  Thank you very much.  I really appreciate it.

	And I yield back, Mr. Chairman.

Chairman Johnson.  Thank you.  If it was proposed by a Senator, 
that must make it bad, "ahem" good.  Excuse me.  I didn't say that.  We are not supposed to comment on the Senate over there, so I will withdraw that statement.

	Mr. Tierney, you are recognized.  Do you care to question?

Mr. Tierney.  Yes, I do.  Thank you, Mr. Chairman.  Thank you, members 
of the panel.

	There was an article in the Boston Globe today talking about the 
fact that one third of the lump-sum payments that millions of Americans are eligible to take for their employee pension funds when they retire, change jobs, or are laid off might be reduced because of this legislation that 
is pending; they might have their amount reduced.  You mentioned, Mr. Iwry, a second ago about having a separate interest rate for that?  Is that the general consensus of all members of the panel that we ought to decouple the interest rate for the lump-sum determinations as opposed to others?  
Start right to left.

Mr. Gebhardtsbauer.  The economy doesn't take a position, so we wouldn't recommend what should be done.  But we do note in our paper that right now, 
as Mark Iwry mentioned, the interest rate is much lower for determining lump-sums.  It is already decoupled.  And it is so low right now at Treasury rates, that it is encouraging people to take lump-sums.  And that may not be good 
for them or good government policy.

	A lot of people for instance took lump-sums in late 1999.  Probably even advisors would say that that lump-sum is more valuable because you can take the lump-sum out and buy an annuity.  And the annuity would be bigger from the insurance company than what you would have gotten from the pension plan, because the employer has to subsidize that lump-sum because of 
government rules.  And so you want to make sure it is not as conservative 
as it is now.  It doesn't have to be the exact same number.  

Mr. Tierney.  But do you see a danger in having it the same exact number 
in that those people might be treated unfairly?

Mr. Gebhardtsbauer.  Where you said it will affect costs, if you 
move the interest rate up for determining how much a pension plan costs and what are the liabilities but you don't move up the lump-sum, then the 
pension plan will still cost a lot more than if you would move the lump-sum rate also up.  If you don't move it all the way up, then again, the pension 
plan will cost a little bit more than maybe originally intended.

	So they don't have to be the same, but it is a cost issue for the employer.

Mr. Tierney.  Cost for the employer or cost the employee big time; right?

Mr. Gebhardtsbauer.  I think you mentioned, by the way, that the interest 
rate would mean that lump-sums are lower.  They would be lower than if the current rule applied, but they actually won't go down because there is a transition rule that phased it in slowly.  Actually, Treasury rates and corporate bond rates aren't that far apart anymore.  And so it phases it in between now and the year 2010.  It is such a slow phase-in that, because you accrue an additional year of benefit and you are one year closer to retirement, that the lump-sum actually doesn't go down.  

	I know Mr. Iwry got calls the last time something like this was 
done because people actually saw a decrease in their lump-sums.  But with 
the transition rule that is being proposed, the one that you mentioned, no 
one would actually see their lump-sum go down, it will just go up.  It 
won't go up as fast as it would have.

Mr. Iwry.  Picking up on my colleague's last point, I think it is not only fair, but prudent to make sure that the lump-sum rate is not increased unduly.  The last time lump-sum rates were increased was in connection with the GATT legislation in the mid-1990s.  The interest rate was adjusted for funding and lump-sum purposes, and the thought was to get it more in line 
with market rates.  There was a lot of pain inflicted, and there were transition rules in place.  The issue had been foreseen, but the transition rules were not effective enough.  And the members heard from constituents in very acute, pointed ways about the problem this had caused their lump-sums.

	This time around I suggest, Mr. Tierney, two elements:  Number one, the interest rate is distorted because we are using this 30-year Treasury 
bond that is no longer being issued, but interest rates are, of course, low 
in general.  Even if we were using something like the 30-year Treasury rate 
as it was a few years ago before these unusual events, before it was discontinued, we would be in a low-interest rate environment and lump-sums would be higher.  Arguably, once you correct for the anomaly that this bond 
is no longer being issued, you have just got a low dip in the 
normal interest rate market performance, the ups and downs of the market, of the business cycle that are part of the bargain.

	I mean, employees could be viewed as getting a windfall because 
their lump-sums are larger because of generally low interest rates, but they are getting the opposite in their 401(k)s and their IRAs, as people are so acutely aware.  I question whether this is the time to tell people that 
they ought to also take a hit on their defined benefit payments.

	In addition, the companies that have been making the argument, which 
I think is a legitimate argument, that we don't want to encourage leakage in our system, are coming to an intermediate point to the effect that we don't want to encourage lump-sums.  Lump-sums don't necessarily equal leakage.  
Most lump-sum dollars are rolled over, even though the small lump-
sums are unfortunately not.  But the large ones are.  And the companies that are concerned about not encouraging lump-sums, by not letting them be as 
large as they might otherwise be, are also converting their traditional DBs 
to lump-sum plans, if you will, cash balance plans whose very 
design is to pay lump-sums.

Mr. Tierney.  Is it the employers who decide whether or not there is going 
to be a lump-sum distribution?  Do they have control over that?  Or is that something that they don't have control over?

Mr. Iwry.  Mr. Tierney, the employer has the control over whether to offer 
that as an option; but unless the amount of the benefit is $5,000 or less, 
the employer doesn't have control as to whether the employee elects the lump-sum.  But as a practical matter, if it provides a cash balance plan, I am in favor of cash balance plans.  I am not criticizing them for this reason.  
But if an employer provides a cash balance plan, it is designed to pay lump-sums, and with very few exceptions nearly all employees take lump-sums.  

	I think the cash balance issue is one of transition.  The plans can 
be very useful even as they pay lump-sums.  They have to offer annuities, so people who want annuities can take them.  The problem is simply how best to protect older workers when companies convert from traditional to cash balance plans.

Mr. Tierney.  Thank you.  And thank you, Mr. Chairman, for the extra 
question.

Chairman Johnson.  Mr. Wilson, you are recognized.

Mr. Wilson.  Thank you, Mr. Chairman.

	And thank you all for being here today on such a tough topic.  I 
think all of you have been extremely instructive.

	Dr. VanDerhei, can you explain to us how the change in the ratio 
of active workers to retired workers is affecting the defined benefit plans? How long will this trend continue, and how can plans best deal with the 
issue?

Dr. VanDerhei.  Well, that ratio is something that is certainly going to 
be very plan specific.  You have industries now where, for a variety of reasons, international competition one of the most important, the number of people that are currently working per retiree is changing relatively drastically.  You have situations in many cases where the pre-funding has 
already been established, realizing that those individuals who are now retirees when they were working and in much larger numbers, that the pre-funding of the current defined benefit system was designed primarily to 
handle that.

	So this is not a pay as you go system as sometimes people think 
Social Security is, but something closely aligned to that, but not completely.  And it is not necessarily going to be the type of situation where if the 
ratio that you mentioned starts to change drastically, that that definitely 
will have an implication on the funding, because of the pre-funding rules 
that have already been set in place.

	Having said that, however, there is no doubt that when those ratios change to the point where the number of actives available, as far as the number of retirees that are currently being paid from the planned finances, certainly does make the volatility much more of an issue for the defined 
benefit planning going forward.

Mr. Wilson.  And Congressman Tierney has already asked some excellent 
questions on this, but Dr. VanDerhei, can you discuss the benefits and possible disadvantages of retirees taking an annuity payout instead of a 
lump-sum distribution?

Dr. VanDerhei.  Well, my primary argument, just based on the assimilations that I discussed earlier for Massachusetts and the ones that we have done 
for Kansas, is that individuals have a tendency to spend what they need out 
of lump-sum distributions not to scientifically try to determine how they should spread that over their lifetime.  That may work fine for people who don't have health care costs that aren't expected or catastrophic health 
care costs such as nursing home care, but we find situations in which once those costs are incurred, if a person does take a lump-sum distribution instead of the annuity, then oftentimes those reserves are going to be 
spent down far, far too rapidly for them to be able to have any 
sustained standard of living after that point in time.

Mr. Wilson.  And Dr. Leary, in your testimony, you state that some of the 
shrinkage in the number of multi-employer plans is due to the merger of small plans.  When these mergers occur, do the participants of both plans receive notice of the merger?  If so, what information is contained in the notice?

Mr. Leary.  Yes, they do receive a notice.  The provisions are set out in 
Department of Labor regulations.  It provides them with all of the 
information about the plan that they would be going into.  It also provide them with an opportunity to comment, provides them with the opportunity to seek additional information, and it also, and probably most importantly, 
advises them that the accrued benefit they have at the point of the merger 
in their old plan will be guaranteed in their new plan.  So they are both fully protected and well-informed regarding the plan into which they are 
going to move.

Mr. Wilson.  That seems very helpful.

	And Mr. Gebhardtsbauer, one of the jobs of an actuary is to help employers know when and how much to contribute to their defined benefit 
plans.  Can you tell us how you determine what employers must contribute?  What kind of assumptions do you use?  How have funding obligations 
changed over the past couple of years?

Mr. Gebhardtsbauer.  That is a great question, because it is changing a lot now.  At one time you could set your formula and say I want a pension plan that is this generous; I want to spend this much, and the actuary would say this size benefit can be afforded by this kind of contribution.  But now interest rates are much lower.  And interest rates are just one of the assumptions the actuary has to forecast for what we think the future is 
going to bring.  But because these interest rates are much lower now, the pension funds aren't going to earn as much money, so now you have to put a 
lot more into the pension plan than you ever intended to maintain that same pension plan from before.

	Now, as Jack mentioned, there is the concern, and the rules enforce this, that you fund pension plans while the employees are working so that by the time they retire you have enough money to pay for their benefits.  If 
you are in a situation where an industry is shrinking, that is a good thing 
to have happen because it is very difficult to fund that later, when there 
are fewer workers now than in the past.  So you want to fund before people retire, while they are working.

Mr. Wilson.  And one final question, Mr. Chairman.

	As you are assuming interest rates, can you tell me what your assumption is say for the next 10 years?

Mr. Andrews.  And all of you can supplement the record in writing on 
that.

Mr. Wilson.  Some of us want to make an investment.

Mr. Gebhardtsbauer.  This is good.  You will forget you asked me this question.  Actually, actuaries don't make assumptions over the next 10 
years; we actually make forecasts over a much longer period.  That pension plan is going to last for a very long time.  But if I was to make a 
prediction based on interest rates, most people would say that it is going 
to be pretty close to where interest rates are today; that we don't know if they are going to go up or down.  You don't want to be market predicted, so you assume that the markets are telling you where interest rates are going 
to be today.  And it looks pretty low.

Mr. Wilson.  Thank you.

	Thank you, Mr. Chairman.

Chairman Johnson.  Dr. VanDerhei, can you tell me, do you have any 
percentages on how many of those plans that are lump-sum can be converted 
to payout over long term?

Dr. VanDerhei.  The most recent figures are from 2000.  And we don't 
know how many plans, but we know how many participants.  And 43 percent of 
all defined benefit participants are in plans that did offer lump-sum distributions.  That is quite an increase.  It was 23 percent in 1997, 
and only 14 percent in 1991.

Chairman Johnson.  But do they ever opt to pay those out over 
long term instead of taking the lump-sum?

Dr. VanDerhei.  Do the employees?

Chairman Johnson.  Yes.  How many of them?  Do you know the 
percentage?

Dr. VanDerhei.  The only figures I have seen is a Watson Wyatt study 
back in 1998 that primarily said that, if you give them the option, the 
vast majority will take advantage of it.

Chairman Johnson.  Taking the lump-sum?

Dr. VanDerhei.  Yes.

Chairman Johnson.  That is what I was afraid of.

	Yes, sir.  You want to make a comment?

Mr. Gebhardtsbauer.  Yes, just to add to that.  I have some good news, and that is that people who are closer to retirement are more likely to take 
the annuity.  And so the area that we need to be most concerned about are 
the ones that most need to take the annuity.  But we also need to be able 
to figure out ways in which we can encourage the younger people to 
also either keep their money in the pension plan or roll it over and eventually annuitize.

Chairman Johnson.  So those that take the lump-sum are generally 
in the 50 year old age category.

Mr. Gebhardtsbauer.  I was thinking under 50.  I just became a 
member of AARP.

Chairman Johnson.  Well, how come you didn't retire?  Thank you.  

	Mr. Wu, would you care to question?

Mr. Iwry.  Mr. Chairman, might I add something?

Chairman Johnson.  Certainly.

Mr. Iwry.  In response to your question, the lump-sums that are spent, that are consumed and not rolled over and saved, are particularly those that are very small and that are forced out of the plan by the employer.  That is, $5,000 or less.

Chairman Johnson.  By the employer changing plans?

Mr. Iwry.  No.  Just the employer typically has a provision that says, if 
your benefit is worth $5,000 or less in terms of its present value, we will just cash it out and send you a check, because we don't want to hold this 
very small account for administrative cost reasons.  Those tend to be 
consumed and not saved.  There is a provision in the law now that the Department of Labor is supposed to be implementing.  They are writing rules that won't take effect until they finished writing rules that would require those to be rolled over if the employee doesn't indicate that they actually want the check.

	In other words, the default, the automatic mode would be that if 
the employee doesn't say affirmatively, yes, give me the money, I know what 
I am doing, it would be rolled over to an IRA by the employer, an IRA that it sets up for that employee.  So we would get a lot less leakage of lump-sums that are most likely now to leak out of the system.  I think Mr. Andrews has supported that or a version of it in legislation that he has proposed.

Chairman Johnson.  Is Labor going to be any faster than Treasury 
in getting us a response?

Mr. Iwry.  I think that Labor is actively working on this.  And, of course, any encouragement that the Committee chooses to give them I am sure would 
be beneficial.

Chairman Johnson.  Thank you.  I appreciate that comment.

	Mr. Wu, you are recognized for five minutes.

Mr. Wu.  Thank you very much, Mr. Chairman.

	I just want to hone in on one issue which you asked about, and I believe the two prior questioners and also perhaps earlier Mr. Andrews 
asked about.  Before I came here, I didn't deal with anybody I knew of who 
had a defined benefit plan.  Everybody had defined contribution 
plans.  And one of the big challenges is that when there is a rollover opportunity, there is a tendency to spend the money when you have your 
hands on it.  And I believe that you all have been talking about this 
leakage phenomenon in the defined benefit context a good deal.  

	Whether you all can address it in a defined contribution or defined benefit context, can you help me out with some statistics, or supplement the record later on with statistics about what percentage of folks wind up, to 
use a short phrase, not doing the right thing?  In essence, not 
providing for the long term?  Apparently, if you just aggregate the numbers and look at large versus small disbursements, you might get different phenomena.  But I would just like to invite the panel to address that challenge, whether it is from a defined benefit or defined contribution perspective with gross aggregate numbers.  You know, how many people are 
going to stay in and take care of the long-term future versus go to Mexico 
and the horse races now?

Chairman Johnson.  They all shook their heads yes.  And any one 
of you may speak, or all of you.

Dr. VanDerhei.  Well, I could just quickly add that we did a study for 
the National Association of Social Insurance back in January 2001 that not only has those numbers as inputs but simulated what would be the policy 
impact of basically putting constraints on at least first order, because obviously there is going to be some planned design impact if you do that.  
But I would be more than happy to send you that study, because we looked 
both from a defined contribution and a defined benefit study standpoint 
that, if you in essence plug those leakages, how much more retirement 
income would be available.  I would be more than happy to send that to you.

Mr. Wu.  I would be very interested in that.  Can you just spout any quick 
numbers now, or would you prefer to keep that in the longer explanatory 
form?

Dr. VanDerhei.  For defined contribution, which is primarily 401(k)s, it 
wasn't as large as most people probably would think.  And this goes back to some of the previous comments that it is primarily the small lump-sum distributions that are being consumed instead of being rolled over.  When I say they are being saved, we are looking at it from a total standpoint 
DB, DC, and IRAs, figuring that that is all going to be there for retirement.  I believe it did not make double digits.

	On the other hand, if you plug all the holes including, and this is 
a big, big assumption, money rolled over to IRAs that has to be left in the IRA until retirement, there is a much, much bigger impact.  It was well into the double digits as far as average retirement income.

Mr. Gebhardtsbauer.  I don't have specific numbers, but I do have a paper 
on why sometimes people don't choose annuities.  And there are quite a few reasons.  For instance, they don't think they are going to live that long, 
and so they want to do it.  But just as Jack has said, and I will go further than that, doing it yourself is not as good as doing it through an 
annuity, because if you do die early, the income doesn't go to yourself, it goes to someone else.  And so if you want to maximize the amount of money 
that goes to yourself in retirement, the best way to do it is with an annuity.  That way, everybody can have more income.  And I have some graphs that show that; you know, Jack was talking about doing it in scientific ways.  

	For instance, one way would be to say predict when you think you are going to live to, your life expectancy.  Say you live 20 years, to age 85.  
If you live beyond your life expectancy, and half the people do, then they 
are not going to have anything after age 85.  If you are a little more 
scientific, you can do something called the minimum required distribution.  
It is something we have.  But again, once you hit your life expectancy, the amount of the money that you pull out of that lump-sum every year starts 
going down.  And in addition, when you do it yourself, you have investment risks.  And a lot of people pulled out lump-sums in 1999 thinking it was the right thing to do, and now they have much less money and realize that wasn't 
a smart idea.

	So Jack has mentioned the investment risk and the mortality risk.  There is an additional factor that is affecting it, too, and that is tax advantages.  The tax advantages are actually going in a direction away from encouraging annuities towards doing the investing yourself.  And so having a 
pension plan and having an annuity are partially dependent on the tax advantages you get through having the annuity or the tax advantage.

	And so if those advantages decrease, then there will be fewer people.  There will be more paper saying that the annuity is not as good an idea, you should do it in other ways.  And so there are different ways to counter balance that by possibly giving advantages to selecting an annuity.  
And so there are various things that you might think about in government policy.  And not only is it helpful to the individual to take the annuity, 
but it also could be justified for the government because there are less people in poverty later, too.

Mr. Wu.  Mr. Chairman, if either of the other witnesses has something to 
say, can we let them answer?

Chairman Johnson.  Quite welcome to.

Mr. Leary.  Just very briefly, it does not arise, particularly in the 
multiemployer defined benefit context, because those plans do not provide 
for lump-sum distributions except in very limited circumstances, such as a death, prior to retirement.

	However, one of the behaviors that I have seen, and this is quite common, is if a participant is in both a multiemployer defined benefit plan and in a defined contribution plan where they have an individual account, people in those circumstances will see the defined contribution plan as a 
bank account in many respects and are able to withdraw it either as a 
hardship withdrawal or with many plans you can withdraw if you separate 
from employment covered by the plan for a period of time.  There is not an 
age requirement.  And the behaviors there are not the behaviors of retirement 
planners; they are behaviors of people looking to obtain a sudden infusion of income.  Now, one reason why they will do that is because they think, I have this defined benefit plan behind me that I can touch.

	Thank you.

Mr. Iwry.  Mr. Wu, I would suggest that one factor here is that the 
statistics on lump-sum distributions and rollovers versus consumption have not, in the past, always included money left behind in the plan.  A lot of people who are entitled to a distribution have the option of leaving the 
money in the plan, and some of them do that.  That is continued saving as opposed to taking the money out and consuming it.  I know Jack VanDerhei's numbers would take into account that kind of a factor, but some of the statistics that have been used in other contexts in the past have 
not taken that into account.  

	But in the broader context, I think as you look at lump-sum policy 
and anti-leakage policy, the two most important things that Congress can do now to improve retirement security in this context and in the context of defined benefit plans generally are probably to solve this funding problem that we have been discussing in a way that gives relief promptly but does 
not provide for a lump-sum shrinkage, does not cut down the amount of lump-sums in any unreasonable manner.  And, second, to solve the cash balance issue.  Which is one that has been polarized thus far, but I think can be solved with a middle-ground approach that gives older workers reasonable transition protection and gives employers reasonable flexibility to convert the cash balance plans and to choose exactly how, but not whether, to 
provide that transition protection.

Mr. Wu.  I thank you for your helpful answers, and I look forward to 
receiving any written materials that you would care to send.  I am very interested in that.

	And thank you very much, Mr. Chairman.

Chairman Johnson.  Thank you, Mr. Wu.  Those were good 
questions.  

	I want to thank the witnesses and the Members for their time today, and I want to congratulate this panel.  I think this is one of the more 
astute and knowledgeable panels that we have had present before us, and I thank you all for your time.

	We are going to have votes here within five or ten minutes, so if there is no further business, we will adjourn.  Does anyone have any comment?  Hearing none, the Subcommittee stands adjourned.


Whereupon, at 3:36 p.m., the Subcommittee was adjourned.


APPENDIX A - WRITTEN OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, 
SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON 
EDUCATION AND THE WORKFORCE